Brent crude fell as low as $36.33 a barrel on Monday, its weakest since December 2008. A fall below $36.20 would take oil down to levels not seen since 2004. (Photo: Reuters)
Crude oil prices are close to 11-year lows on account of excessive supply. A forecast from the International Energy Agency (IEA) that the global supply glut is likely to deepen next year dragging down the prices further. US crude was down 0.2 per cent at $36.24 after falling as low as $34.53 on Monday before ending nearly 2 per cent higher. Brent crude fell as low as $36.33 a barrel on Monday, its weakest since December 2008. A fall below $36.20 would take oil down to levels not seen since 2004.
Crude prices are on a downward spiral since OPEC on December 4 abandoned its output ceiling. In the past six sessions till December 11, crude oil prices shed more than 13 per cent in the inernational markets. On the domestic front, it slid nearly 11 per cent in the past five days. Prices of crude oil in the domestic markets fell from Rs 2,742 per barrel on December 4 to Rs 2,455 per barrel on December 11.
According to markets experts, OPEC is gripped by a deep divide between two factions, one led by the top oil producing nation Saudi Arabia and its rich allies in the Gulf that can stomach cheap oil and another led by Nigeria, Venezuela and other countries that need higher prices to boost their economies. America’s shale gas boom has also had a significant impact on the tapering demand for crude. The overall slowdown sentiment is also hurting crude prices negatively.
In a larger perspective, falling crude oil prices are positive for various sectors. G Chokkalingam, founder, Equinomics Research and Advisory said, “Sectors which would benefit from falling crude oil are oil marketing companies (OMCs), tyre industry, synthetic fiber producers, several range of businesses, which use oil derivatives as core inputs like the producers of lubricants, transformer oils, plastic products, soaps and detergents, etc.”
Nikhil Kamath, director, trading and risk, ZERODHA said, “Some of the sectors positively impacted by lower crude prices are aviation, auto and FMCG companies, with all of these directly or indirectly benefitting from lower crude prices.”
Below are five stocks which could benefit from sliding crude oil prices:
Supreme Industries
Recommended By: Geojit BNP Paribas Financial Services
Why Buy: Supreme Industries (SIL) is a major player in plastic industry. SIL’s product segment includes, plastic piping, packaging products, industrial and consumer segment. The company is a major beneficiary from steep fall in crude prices, as major raw materials used by SIL are directly derived from crude oil.
Anil R, research analyst, Geojit BNP Paribas, said, “The prices of key raw-materials used by SIL during the first quarter of the ongoing fianancial year (Q1FY16) (July–September), PVC – dropped by 15 per cent year-on-year (YoY) to Rs 65 per kg and polypropylene dropped by 28 per cent YoY to Rs78 per kg. Consequently, SIL’s Q1FY16 gross margin improved by 340 basis points YoY to 36.1 per cent vs 32.7 per cent. In addition, overall finance cost came down to 1.3 per cent of sales in Q1FY16 vs to 1.8 per cent YoY. We expect SIL’s revenue to grow at 11 per cent CAGR and PAT at 12 per cent CAGR during FY15-17E. Currently, we have an “Accumulate” rating for the stock with a target price of Rs 704.”
Asian Paints
Recommended By: Geojit BNP Paribas Financial Services
Why Buy: Asian paint is one of the beneficiaries out of this free fall of crude prices. Its key raw materials are derived from crude oil this includes Titanium dioxide (TiO2), additives, pigments, resins, solvents etc. Asian Paints is the market leader in the decorative paint segment with a 54 per cent market share. During the first half of FY2016 (H1FY16), the costs of raw material to sales come down by 641 basis points to 50.1 per cent YoY.
Antu Eapen Thomas, research analyst, Geojit BNP Paribas, said, “We have seen a rise in gross margin by 313 basis points YoY to 46.3 per cent and profit grew by 25 per cent YoY to 854 crore in H1FY16. We feel that the company may not pass all the benefit on the softening of oil prices. This will directly benefit Asian Paint’s margins and will add colours to their profitability even with the same volume. Consequently, it can use this additional funding for their marketing and promotional activities. Going forward, we expect Asian Paints can generate a sales and profitability growth of 12 per cent and 20 per cent CAGR respectively over FY15-18E. Hence, we recommend accumulating the stock with a price target of Rs 901.”
Hindustan Petroleum Corporation
Recommended By: Equinomics Research
Why Buy: Oil marketing firms would be the major beneficiaries of lower crude oil prices – this would reduce their subsidy burden and improve their balance sheets. Cheap fuel prices would also promote their consumption from the retail outlets. Chokkalingam, said, “Hindustan Petroleum Corp (HPCL), the country’s third biggest oil refiner, is negotiating with its partners in the Mozambique gas field, operated by Anadarko Petroleum Corp., to bring natural gas to India for its upcoming liquefied natural gas (LNG) terminal in Gujarat. The deal will not only give HPCL access to gas, which is logistically cheaper to source, it will also give the company a cost advantage in its natural gas trading business, which it started last financial year. We believe the share price of HPCL can touch Rs 1,000 in the next few quarters.”
Sutlej Textile
Recommended By: Equinomics Research
Why Buy: According to the brokerage house, Sutlej Textiles uses both natural fibre and synthetic fibre for manufacturing cotton and synthetic textiles, would be the major beneficiary of the crash in input prices with some time lag. Sutlej has a consistent track record of paying dividend since incorporation. A very few companies in this country have such track record. The dividend has grown from 10 per cent in FY2009 to 80 per cent in FY2014. The textile industry would change its prospects significantly in the next 2 to 3 years and hence, Sutlej Industries, with sound fundamentals, would be one of the major beneficiaries of changes in the valuation multiples visualised in next 1 to 3 years. The share price of the company can touch Rs 650.
InterGlobe Aviation
Recommended By: ZERODHA
Why Buy: Fuel Expenses form over 30 per cent of total expenses borne by airline companies. Kamath of ZERODHA, said, “Reduced fuel prices will have a significant positive impact on the bottom lines. We recommend a buy on InterGlobe Aviation shares with a stop loss at the Rs 900.”
(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online).
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